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spk01: Greetings. Welcome to Leidos' fourth quarter 2021 earnings call. At this time, all participants are in listening mode. The brief question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll turn the conference over to Stuart Davis with Investor Relations. Stuart, you may now begin.
spk06: Thank you, Rob, and good morning, everyone. I'd like to welcome you to our fourth quarter and full fiscal year 2021 earnings conference call. Joining me today are Roger Crone, our chairman and CEO, and Chris Cage, our chief financial officer. Today's call is being webcast on the investor relations portion of our website, where you'll also find the earnings release and supplemental financial presentation slides that we'll use during today's call. Turning to slide two of the presentation, Today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, does include risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. Finally, as shown on slide three, during the call, we'll discuss GAAP and non-GAAP financial measures, a reconciliation between the two is included in today's press release and presentation slides. With that, I'll turn the call over to Roger Crone, who'll begin on slide four.
spk07: Thank you, Stuart, and thank you all for joining us this morning. 2021 was a banner year for Leidos, with industry-leading organic revenue growth and expanded profitability. In addition, we enhanced our market presence during the year with strategic acquisitions and investments that added important technical capabilities. Despite the ongoing impact of COVID-19 and an extended continuing resolution, we are positioned to grow in 2022 bolstered by our scale, differentiated technical offerings, and dedicated workforce. In my remarks, I'll address four topics. Our financial results and outlook, capital allocation, business development, and people. Number one, our financial performance in the quarter was strong despite a challenging market. Revenues for the quarter were $3.49 billion, up 7% year over year. For the year ahead, revenues grew organically across all reportable segments and were up 12% in total compared to 2020. In 2021, our adjusted EBITDA margin of 11% represented the sixth consecutive year of margin expansion. And non-GAAP diluted EPS was up 14% to $6.62. We generated $210 million of cash flow from operations in the quarter and free cash flow of $177 million. For the year, that translates to $1.3 billion of cash flow from operations and $927 million in free cash flow. These results came despite well-documented headwinds, most notably a protracted continuing resolution which slowed both tasking on existing contracts and the award of new opportunities, a resurgence of the pandemic which lowered workforce productivity and limited our interactions with customers, and a national security community transitioning to new threats. I am proud of how well the team weathered these headwinds. In 2021 we achieved our guidance for all of our metrics, but the standout metric was cash, which came in well ahead of our expert expectations through close coordination with our customers and strong operational focus our asset light model. lean cost structure, and efficient collections process enabled us to generate strong cash flow that we can deploy to grow our business and drive value for our shareholders. Which brings me to number two, capital allocation. Over the fiscal year, capital employment was balanced with a mix of strategic acquisitions, debt pay down towards our target leverage ratio, an enhanced dividend, and share repurchases. In the fourth quarter, we made a strategic investment in Hawkeye 360 to build on our multi-decade heritage of serving national security space customers. Hawkeye 360 is driving innovative solutions around space-based radio frequency data and analytics, and we're confident this investment will enable us to better serve key customers who safeguard the United States and allied interests. On the opposite side of the ledger, we agreed to divest Aviation and Missile Solutions, LLC, a small CETA business within Dynetics. This divestiture allows us to focus on leading-edge and technologically advanced services, solutions, and products that are more in our sweet spot. In 2021, we put $270 million towards repurchasing our shares. Looking ahead, our Board of Directors authorized a new share repurchase program of up to 20 million shares, replacing the prior authorization. We only had 4.5 million shares remaining on our 20 million share authorization from 2018, and we thought it prudent to increase our buyback capability. Under the authorization, we can repurchase shares in the open market or through privately negotiated transactions, including accelerated share repurchase transactions. Based on the current valuation of our stock, our financial outlook, our liquidity, our view of the M&A market, and a consistent operating environment, We expect to be more aggressive on buybacks in 2022, and Chris will provide more color on that shortly. Number three, in business development, the December quarter is the seasonally weakest for our industry. Still, we achieved net bookings of $3.2 billion in the quarter, representing a book-to-bill ratio of 0.9%. Importantly, about half of the awards were for new work. For the year, we booked $15.5 billion of awards for a book-to-bill ratio of 1.1. Our bookings don't include anything for the roughly $4 billion of protested awards we've been tracking, although earlier this month we received positive developments on two of them. The FAA re-awarded us our incumbent work modernizing the National Airspace System, and GAO denied the protest of our takeaway of the NASA Network and Communications Program, known as AGES. We're still awaiting word on whether either firm continues to object. Total backlog at the end of the quarter stood at $34.5 billion. which doesn't include any future task orders for many of our large single award IDIQs like NGIN. With total backlog almost two and a half times our 2022 revenue, we have a strong foundation for growth. In the fourth quarter, we had large awards in each sector, including ISR support for the Air Combat Command in Defense, operational support to a publicly traded utility, and R&D support to the National Energy Technology Laboratory in civil, and IT support to the Federal Parent Locator Service in health. I want to focus on another award that speaks to what makes Dynetics so attractive to us. Our Dynetics subsidiary was awarded a six-year $479 million cost plus fixed fee contract to develop hypersonic thermal protection system prototypes for the U.S. Army's Rapid Capabilities and Critical Technologies Office. Under the contract, Dynetics will also support materials research, novel inspection, and acceptance efforts. The thermal protection system shields elements of the long-range hypersonic weapon system and the Navy conventional prompt strike system from extreme environments seen during flight. The Army and Navy working jointly have made hypersonic weapons their top priority, and this program is just one of the ways that we're supporting the broader hypersonic program. We're also the prime contractor for the common hypersonic glide body weapon and a key subcontractor for the long range hypersonic weapon system. These programs are well funded and Dynetics is right at the center of them. Number four, our ability to recruit, retain, motivate, and grow our people is critical to our success. We were relatively flat from a headcount standpoint in the quarter, but we're up 11% for the year. As tough as this year has been for our customers and the market, it's been just as tough for our people. I would like to take a moment to thank the 43,000 Leidos employees for their unwavering commitment and collaboration in light of COVID challenges. We asked a lot of them and they truly delivered. Whether executing a complex NGEN transition three months ahead of plan or successfully delivering the MHS Genesis electronic health record system to an additional 10,000 clinicians and providers as part of its largest wave deployment to date, our teams have put mission first and delivery for our customers. One of the ways that we support our people is through a company culture that fosters a sense of belonging, welcomes all perspectives and contributions, and provides equitable access to opportunities and resources for everyone. Inclusion and integrity are intrinsically linked by the responsibility to respect yourselves and others. Our employees are empowered to uphold our values, creating a culture that we are incredibly proud of, and that makes Leidos unique. We're committed to continued transparency in how we're doing from a diversity standpoint, as well as making the lives of our employees and their communities better. For the first time, we'll publish our consolidated EE01 report on our website which includes detailed information regarding workforce diversity so we can chart our progress on the journey. Before turning it over to Chris, I'd like to address the current budget environment. Since the Q3 call, Congress passed the fiscal year 2022 National Defense Authorization Act, and President Biden signed the bill into law. The NDAA legislation authorizes approximately $740 billion for defense programs, a $25 billion increase to last year, and well above the original presidential request. Bipartisan leadership of the House and Senate Appropriations Panels reached an agreement on February 9th on the physical year 2022 top line spending numbers for defense and non-defense programs. Spending levels won't be publicly announced until after the Senate passes another CR. However, it appears there will be an increase for defense accounts and a slightly larger increase for non-defense accounts. Ultimately, 12 appropriation bills will be packaged into a single omnibus bill for floor consideration. We are hopeful that the omnibus will be brought to the floor by March 8th so the President can approve it, so it can be approved by the Senate and then signed by the President before the March 11th CR deadline. With that, I'll now turn the call over to Chris Cage for more details on our results in our 2022 outlook.
spk09: Thanks, Roger, and thanks to everyone for joining us today. With lots to cover, let's jump right into the results, beginning with the income statement on slide five. Revenues for the quarter were $3.49 billion, up 7% compared to the prior year quarter. Excluding acquired revenues of $52 million, revenues increased 6% organically. For the year, revenues were $13.74 billion, which was up 12% in total and 9% organically compared to 2020. In the quarter, we saw a continuation of the behavior that we cited on our Q3 call, where some customers, especially in the defense and intelligence sectors, worried about the extended CR and held back on funding. This was exacerbated by the limited ability to meet with customers with the onset of the Omicron variant, and lower than anticipated direct labor given higher than normal paid time off usage by employees on cost-reimbursable contracts. These factors led to revenues in the lower half of the guidance range that we gave on the last call. Turning to earnings, adjusted EBITDA was $359 million for the fourth quarter for an adjusted EBITDA margin of 10.3%. Margins were down sequentially and year-over-year consistent with our prior messaging, Although higher than normal leave-taking and lower than normal net favorable impacts from EACs lowered margins 20 to 30 basis points below our expectations. For the year, adjusted EBITDA was $1.51 billion, which was up 14% over fiscal year 2020. Adjusted EBITDA margin of 11% was an improvement of 20 basis points over 2020. In 2021, we benefited from a $26 million gain related to the Mission Support Alliance joint venture recorded in the first quarter and the backlog of disability exam cases that were pushed from 2020 to 2021 because of COVID. These two items added 60 basis points to the 2021 adjusted EBITDA margin. Non-GAAP net income was $224 million for the quarter. and $952 million for the year, which generated non-GAAP diluted EPS of $1.56 for the quarter and $6.62 for the year. For the year, non-GAAP net income and non-GAAP diluted EPS were up 13% and 14% respectively compared to fiscal year 2020. EPS growth benefited from a reduction of about 2 million shares from repurchases during the year. The non-GAAP-affected tax rate came in at 22.4% for the year, which was in line with expectations. Now for an overview of our segment results and key drivers on slide 6. Q4, defense solutions revenues of $2.06 billion increased by 7% compared to the prior year quarter. Excluding the acquisitions of 1901 Group, Gibbs & Cox, and a small strategic acquisition, defense solutions revenue were up 4% organically. The largest growth driver was the NGIN-SMIT ramp, which more than offset the completion of the human landing system base contract within Dynetics and the program supporting operations in Afghanistan. For the full year, Defense Solutions revenues were $8.03 billion, an increase of 9% in total and 6% organically. Civil revenues were $800 million in the quarter compared to $811 million the prior year quarter. down 1% in total and organically. In the quarter, lower deliveries of security products outweighed increased demand on existing programs with commercial energy providers, the FAA, and the National Science Foundation, and the transfer of a small number of programs from the Defense Solutions segment. For the year, civil revenues increased from $2.99 billion in 2020 to $3.16 billion, driven by on-contract growth across many programs, and a full year of contribution from the L3Harris Technologies security detection and automation business acquisition. Health revenues were $630 million for the quarter, an increase of 23% compared to the prior year quarter, and all of that growth was organic. The largest year-over-year increase was in the disability examination business, with the military and family life counseling program and DIMSOM up nicely as well. As we previewed on the last call, fourth quarter revenues for the health segment were down from the third quarter as we completed the backlog of cases from 2020. Health revenues were $2.55 billion for the year, up 30% over 2020 with the same drivers that I cited for the quarter. On the margin front on slide seven, Defense Solutions margins were relatively stable. Non-GAAP operating margin came in at 8.2% for the quarter. compared to 8.9% in the prior year quarter, and 8.6% for the year, compared to 8.2% in 2020. Civil non-GAAP operating margin for the quarter was 10%, which was up sequentially but down from 12.3% in the prior year quarter. Civil non-GAAP operating margin for the year was 10.2%, compared to 11.7% in the prior year. Declines in segment profitability for the quarter and year were primarily attributable to lower volumes of security product deliveries. Health non-gap operating margin for the quarter decreased from 18.5% in the prior year quarter to 17.8%, primarily from investments to enhance long-term program execution. Health non-gap operating margin for the year increased from 14.4% in fiscal year 2020 to 18.8%, primarily from increased volume on fixed unit price programs. Turning now to cash flow and the balance sheet on slide eight. Operating cash flow for the quarter was $210 million and free cash flow, which is net of capital expenditures, was $177 million. This was exceptional performance across every segment and enabled us to close out the year with operating cash flow of $1.03 billion, well above our guidance threshold of $875 million. Free cash flow for the year was $927 million for a 98% conversion rate. Without the $62 million headwind from the CARES Act tax deferral, we would have exceeded our 100% conversion target for the fourth straight year. As we close out the year, we remain committed to a target leverage ratio of three times. Our long-term balanced capital deployment strategy remains the same and consists of being appropriately levered and maintaining our investment grade rating returning a quarterly dividend to our shareholders, reinvesting for growth, both organically and inorganically, and returning excess cash to shareholders in a tax-efficient manner. On now to the forward outlook on slide nine. Before commenting on 2022, let me first close out the financial projections we gave at our 2019 Investor Day. FY21 marked the end of a three-year forecast period, and we exceeded or achieved all of our financial targets. Over the period, We grew organically at a compound annual growth rate of 7% versus a 5% target, achieved an adjusted EBITDA margin of 10.8% versus a 10% or greater target, and converted 116% of adjusted net income into free cash flow above our 100% or greater target. As we look towards 2022, there are some important factors to consider. There is no guarantee that we'll get an omnibus spending bill in February. The continuing impacts of COVID are unknown, and it's likely that Omicron won't be the last coronavirus variant. We can't be sure how long it will take to get our two large takeaway awards through the protest cycle, and we should expect that the large awards that we will receive this year will be delayed through protest. We want to take a measured, balanced approach to guidance, recognizing that there are significant outside forces to contend with. With that, let's walk through the drivers for each metric. We expect revenues between $13.9 and $14.3 billion, reflecting growth in the range of 1% to 4% over fiscal year 2021. This growth would almost entirely be organic when balancing the remaining revenues from 2021 acquisitions with the divestiture that Roger mentioned. To put that growth into context, let's consider the puts and takes moving from 2021 to 2022. On the positive side, we have engines. and some other winds that are still ramping that provide good visibility into the upside. On the negative side, we have about 160 million of headwinds from the Afghanistan drawdown, about $80 million reduction in disability exam volume, and another $80 million from the human landing system program. These were all known and discussed as of the Q3 call. Since then, a few additional headwinds have emerged. we were not awarded the follow on to our NGA UFS work that was consolidated into the UDS procurement. UFS represented about 100 million of revenue in 2021 with the opportunity to more than double that amount if we had won UDS. In addition, the customer has recently notified us that they are not yet ready to complete the RHRP transition. This program should generate about 150 million of revenue a year and the start date has now been pushed from January until September. Finally, the multibillion dollar FAA network procurement known as FENZ has just been pushed from an expected award date in Q1 to at least Q4. Moving on, we expect 2022 adjusted EBITDA margin between 10.3 and 10.5%. The midpoint of the margin range is the same as 2021 when you exclude the $26 million MSA gain and the extra disability exam caseload. And the top end of the range is consistent with the target we laid out at our October Investor Day. We're committed to long-term margin expansion with multiple levers over time. We expect non-GAAP diluted earnings per share for the year between $6.10 and $6.50 on the basis of 142 million shares outstanding, which is unchanged from fourth quarter levels. Finally, we expect operating cash flow of at least $1 billion. This guidance incorporates the final $62 million repayment of the 2020 CARES Act payroll tax deferral. As you're aware, there is a provision of the Tax Cuts and Jobs Act of 2017 that went into effect at the start of the year that requires us to capitalize and amortize research and development costs. Our operating cash flow guidance assumes that the provision will be deferred, modified, or repealed. We currently estimate the impact of the provision on fiscal year 2020 operating cash flow, 2022 operating cash flow, to be about $150 million. Expanding on Roger's capital allocation comments, we expect to deploy a significant portion of our operating cash flow toward share repurchases, assuming no unforeseen material developments in our operating environment. Depending upon the share price and timing of any repurchases, we currently estimate this could add 10 to 20 cents to 2022 non-GAAP EPS. The $6.10 to $6.50 range we provided does not account for any repurchases and we'll update you all as we go through the year. Given the industry factors that we've addressed, we expect a slower start to the year with a sequential decline in revenues in Q1, which is normal for us. We expect both revenues and margins to build significantly throughout the year. Now, a couple of other comments to help you with modeling 2022. We expect net interest expense of approximately $190 million and a non-GAAP tax rate of about 23%. Capital expenditures are targeted at approximately $150 million, or roughly 1% of revenues. Before we open up for questions, I would like to comment on something you will see in our upcoming 10-K filing related to a portion of our business that conducts international operations. In late 2021, we discovered through our internal processes Activities by certain of our employees and third parties raising concerns that there may have been violations of our code of conduct and potentially applicable laws, including the FCPA. We're conducting an internal investigation led by an independent committee of our board and have retained outside counsel to investigate. We voluntarily self-reported our investigation to the DOJ and SEC. Because the investigation is ongoing, we're not able to anticipate the ultimate outcome or impact. As we look to 2022, we recognize the challenges but believe we're well positioned to navigate them. Ultimately, the issues facing our industry are transitory, and what remain are urgent needs for our customers and a compelling value proposition that we can offer as the largest, most capable company in our industry. With that, I'll turn the call over to Rob so we can take some questions.
spk01: Thank you. We'll now be conducting the question and answer session. If you'd like to ask a question today, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions, and once again, that's star 1. Thank you. And our first question comes from the line of Seth Seifman with J.P. Morgan. Please proceed with your questions.
spk08: Hey, thanks very much and good morning.
spk07: Good morning, Seth.
spk08: Chris, I think if I caught the headwinds you mentioned, it probably, you know, it sounds like it adds up to maybe, you know, $450 million or so for 2022. And I guess, you know, if you could outline the places where you expect to be able to offset that, just given that, you know, by itself, you know, it seems like a reasonable, you know, amount of headwind to overcome next year.
spk09: Sure, Seth. Thanks for the question. No, absolutely. I mean, we're fortunate that going into the second year of the NGIN program, we have really strong visibility into how that program will continue to ramp up and And kudos to our team that's just done an excellent job getting that transitioned early. And now we're starting to see some of the project work that follows on to that program as well. So that's certainly one catalyst. We previously talked about the Military Family Life Counseling Program continuing to ramp up as we transition forward. Roger featured the Thermal Protection System Program. There's several nice things going on within Dynetics that we're excited about. The IFPIC program that we won in the third quarter. a thermal protection program. Those will both be transitioning into a growth mode. We had expected, obviously, we were hopeful RHRP would have been a big growth catalyst for us this year. We still expect it to be, but that's been pushed out for six months now. And then ultimately one of the other big swingers will be what happens with Aegis. We've modeled Aegis to come in later in the year because we're anticipating potentially further action by the incumbent to delay that award. If they don't, that potentially gives us upside on the revenue line But that's how we've positioned it within the guidance that we've provided today.
spk08: Okay, great. Thanks. And then maybe just to dig in a little bit more, I know you guys don't guide by segment, but just for health, you know, you talked about the $80 million exam headwind. But just, you know, if we thought about health at the overall level, just because it's been that piece of the business has been running so hot, just, you know, thinking about the you know, even qualitative discussion about the overall level of growth or contraction in health and the level of margin pressure?
spk09: Well, as we said, we do expect to be able to continue to grow our health business. We have programs like DIMSOM that continue to ramp up, which gives us a nice visibility there. Ultimately, our HRP will be an important contributor, but the 2022 revenue and profitability for the segment is consistent what we've been trying to position, which is we knew that margins would be coming down. We had talked about potentially in the mid-teen area. We're on track with that expectation. The COVID case backlog has been worked down, but that particular line of business still performs excellently, and we're very pleased with their performance. And there's a number of other large opportunities in the pipeline But given the timing that we've seen on how procurements have been delayed, we're just being cautious about when those procurements might come out and our ability to win those and begin to execute. Great.
spk08: Thank you very much.
spk09: Thank you. Great.
spk01: Our next question comes from the line of Sheila Caigu with Jefferies. Please proceed with your questions.
spk03: Hey. Good morning, Roger, Chris. Good morning, Sheila. I might as well ask about the balance sheet then. You know, you both mentioned more aggressive with share repurchases. Obviously, that's deviating a little bit from your, you know, M&A strategy. So how do you kind of think about that, you know, and what's your appetite for larger deals?
spk07: Hey, thanks, Sheila, and good morning. You know, we're pretty transparent on the bigger deals. You know, we're not really enthusiastic about what is out there. And we've talked about this before, of course, Sheila, is that we've done some major transactions over the past several years, and we're now performing against those. And our M&A is really focused on adding a capability or access to a new customer, and those tend to be smaller. And, you know, barring something that really is transformative, um, you know, our, our capital allocation is going to stay the way it has been, which is, you know, we invest in the company, you know, we, we, we pay a dividend, um, you know, we maintain our debt level and then we find a tax efficient way to give the excess cash back, uh, to our shareholders. And of course we've said some things this quarter that, um, indicate that we have less need for that cash. So, uh, you know, take that as you will, but, um, We are such a great cash generator, and our ability year over year to raise the dividend, buy back shares, I think is impressive. And we're just saying we believe that will continue in the future.
spk03: And then maybe one on civil segment. I think it declined in the quarter, and it was one of the – I think it was the lowest growth segment in 2021, but it's unlike your – and I'll say end market outlook. So can you kind of talk about what drives the acceleration of growth in civil and kind of your expectations there for 2022?
spk07: Well, I'll talk about a couple of things that I'll let Chris follow. Civil is an area where protests and program delays really hurt us. We have a program named Films, which is in protest. Aegis was in protest. The FENS program at one time could have been a 21 award. Then we thought it was a first quarter 22, and now it looks like it's a third quarter 22. So, you know, as we mentioned both in my piece and in Chris, the delay of acquisitions have, I think, hurt the industry across the board. And for us, I think civil took a major part of of the brunt of that. But by the way, these programs are still going to happen. And so we're enthusiastic about our competitive position. The customer just has to get them through the acquisition cycle, and they've got to get awarded, and then we've got to sort our way through the protest period. And we mentioned with AGIS, we don't know what's going to happen to AGIS You know, some of that upside, maybe that will get resolved earlier. But if there's another round of protest to court or federal claims, you know, it could be summer again. And then the Omicron variant, you know, kind of kept our security detection business sort of at nominative levels. You know, we were hoping for a much stronger rebound in, you know, And although we have seen a rebound, but nowhere near what we had hoped. And, you know, I don't know. Here in D.C., we look like we're coming off the back of Omicron. We have our fingers crossed. But I've said that before, and there could be another variant right behind it.
spk09: Yeah, Sheely, the only thing I'd add, I mean, Roger mentioned a few. We certainly continue to see a number of digital transformation, IT modernization opportunities within the civil customer set, and those tend to be bigger and they tend to take longer to get through a decision process, but we like that aspect of the pipeline. But he also mentioned SD&A, and that will continue to be something that we're assuming is not a growth catalyst in the near term, but positioning that for 23 and beyond. Great. Thank you.
spk06: Yep.
spk01: Next question comes from the line of Matt Akers with Wells Fargo. Please receive your questions.
spk10: Hey, good morning, guys. Thanks for the question.
spk01: Hey, good morning. Good morning, man.
spk10: I was wondering if you could comment on, you know, the long-term 5% to 6% organic growth target and just if you could give us maybe sort of a walk of what are kind of the biggest things. I know you mentioned some of the things at Civil in the last question, but if you just could sort of kind of bridge the gap from 22 growth to where you think you'll be longer term.
spk07: Well, I'll mention a couple things I'll let Chris add, but the Defense Enclave Services, you know, if you were around the office, you want to know what we're talking about in the hallways. I mean, we were right up against that award, and that's a – it's just a large program. I can't underestimate how big that program is. And, you know, there's another competitor, and, you know, it's a very competitive program. And we're hoping there will be a first quarter award with probably at least a 100-day protest, maybe more than that. And so that will start to ramp, assuming we win that later in the year. And then Chris touched on a couple of things, our HRP. We'll start ramping. We'll get a full year of Navy next gen. So there's a lot that can happen for us that's very, very positive. But here we are in the first quarter, frankly, with a fair amount of uncertainty. And, you know, you saw where we are on the guide. It's a nice range on the guide. You know, we're going to do everything we can to get to the high end of that. But with the CR and Omicron and Ukraine and everything else that's going on, We thought positioning ourselves where we did was the right thing to do.
spk09: That's right. And, Matt, just a couple other things I'd mention. Again, as we look towards, you know, that three-year time horizon, especially 23 and 24, I talked about a couple of the Dynetics programs. We continue to be excited about the positions on prototype programs that they're winning, which ultimately we have every expectation will turn into, you know, more full-scale production programs, and those could – be significant growth catalysts for those out years. The return of the aviation screening market, again, cautious outlook in 2022, but we're several hundred million dollars below levels pre-pandemic for that combined business as far as the top line goes. So that could be a future growth catalyst area. And then Roger mentioned, you know, a couple of the big programs that we're tracking, whether it be DES or FENS, Aegis, and there's many more in the pipeline. So that's how we kind of think about it. There's You know, several things that we anticipate over the course of this year will position us for accelerating our growth rate. But until we can bring those things in with more visibility, we'll be cautious on the near-term outlook. Great. Thanks. That's helpful.
spk10: And I guess is there anything more you can tell us on, you know, you mentioned the issue that you discovered late last year of potential FCPA issues. violations. Is there anything more you can give us on the magnitude or when that might get resolved?
spk07: Yeah, you know, we wish we could, but when you have these open investigations, you know, we're really restrained on what we can tell you. So, you know, and I think Chris pretty much paraphrased the paragraph you see in the litigation section. in the K, what we will tell you is when we have more to tell you, we'll let you know. But, you know, right now it's an open investigation, and we're proceeding, and sometime in the future we'll have more to say. Understood. Thanks.
spk01: Yep. Our next question comes from the line of Gavin Parsons with Goldman Sachs. Please receive your questions.
spk12: Hey, good morning. Hey, good morning, Gavin Parsons. Chris, I appreciate all the color on the revenue bridge, on the headwinds and tailwinds. Could you help us quantify the impact this year of assumed full quarter of a CR, the procurement delays, the COVID-related utilization, any of those other headwinds that aren't the program-specific numbers you just gave us?
spk09: Well, it's all kind of tied in. As we thought about that, we took a view of when decisions might be made on some of the new programs that we're chasing and also kind of really layering in what we saw in the third and fourth quarter as far as lower than normal activity on kind of on-contract growth activity, Gavin. So, again, it's more of a point-by-point as we thought through our pipeline and award timing and decisions, but obviously where we positioned kind of the midpoint of the growth, you know, all those things considered, you know, shaved a couple points off of where we ordinarily might have been.
spk12: Got it. So then maybe to Roger, how do you think about the level of conservatism that that does encapsulate, kind of given how unpredictable a lot of these headwinds have been? But it also sounds like maybe you're assuming some contribution from DES, which could be a coin flip. So how are you thinking about the level of conservatism that you've baked in here?
spk07: Well, you know, we really want, especially with everything that's going on this year, we want to be – in a really balanced position here in the first quarter. And then as these decisions, you know, we need to get an omnibus, we need to get some of these programs awarded. As we can release that risk, then, you know, your words, not mine, conservatism, we would rather call it balance. We can rebalance where we are throughout the year. And there are just so many multibillion-dollar opportunities ahead of us, that with potential for another COVID variant. I think we're going to get an omnibus, but if not, I mean, there's still people in Washington saying there could be a potential government shutdown. And here we are, and we haven't even had the State of the Union or the skinny budget by the president. So there's a lot of uncertainty here in D.C. if you listen to the radio. And so we just want to be in a position where we've got a good range and we can work our way up in the range as these risk items get released. Got it. I appreciate it.
spk12: And a quick clarification to Matt's question. Is 5% to 6% still the right three-year range, or should we think of this year as abnormally disrupted and then it's 5% to 6% after 22?
spk09: Yeah, we haven't, Gavin, at this point in time, we're not changing kind of that three-year kegger outlook, right? there's lower starting point than we had anticipated given the dynamics that have played out over the last couple months. But as we pointed to, many paths to continue to get there. And as we resolve some of these major swingers such as DES and others in the near term, hopefully we'll be able to give you more clarification on that three-year outlook. Got it.
spk10: Thank you.
spk01: Our next question is coming from the line of Robert Spingarn with Mellius Research. Please proceed with your question.
spk11: Hi, good morning. Morning. Morning. Hey, I don't know if Roger or Chris, which one of you want to take this, but we talked about 22 being a bit of a transitionary year from a revenue perspective. I wanted to try, you know, with COVID lingering and the CR going into March, I wanted to ask the question from a margin perspective. And, you know, you've got civil which improved a little sequentially, but is still down on the security detection. How do you think about the segment margins in 22, and how does that compare to normal?
spk09: Well, I'll start. Roger might have some thoughts here, too. Robert, I would say that we've been signaling for some time now that health was running at an elevated level, and that was going to moderate down. And I'll tell you that the conversations we've been having internal to the business around the other lines of business have been around Margin expansion opportunities and where are those going to come from and what actions are we taking so as we built our 2022 you know we're. we're finding opportunities and challenging the business leaders to drive margin expansion across their portfolios and you know we're doing that in a thoughtful and balanced way but but have. you know, good confidence on the levers to pull to make that a reality over time. So I think that's what you should continue to see is a little bit more rebalancing of the margins across the portfolio and then getting the health group to a position that is stable that we can grow off of for there. And so that's the way 22 should play out for you as far as margins go.
spk07: And, you know, Rob, we've – Well, go ahead and ask your question on me. Okay.
spk11: Well, no, I didn't want to interrupt you, Roger.
spk07: No, Rob, I don't want to interrupt you.
spk11: Well, longer term, you know, getting back to like an 11% type of number, what time frame should that be?
spk09: Well, for civil, if you're talking about civil specifically, I mean, it gets to 11% if there's a significant rebound across our aviation screening market. That's critical to that portfolio, and that's an above-average margin piece of the portfolio. The volume needs to increase there. As we've signaled, we're hopeful at this point in time we'll see that continuing to get to those levels starting in 2023 and growing from there. But the core aspects of the portfolio wouldn't be 11% without a decent contribution across the security products business.
spk07: Hey, Rob, I'll make the point that I was going to make earlier. You raise margin in our business really two ways, right? Through operating performance, being more efficient, scale, being able to spend less capital, less R&D, less marketing, because you have size, right? And we've been on that journey, and you've seen some real benefits from that. The other way you can raise margin in our business is you change your mix, right? We We don't bid on relatively low LPTA 3% bids, and we bid on highly value-added, differentiated programs like the thermal protection system. But if you've got a contract that's four or five years to support a mission where you're doing operations and maintenance work, those things have to roll off. So the portfolio mix... It doesn't change as quickly as perhaps you would like or perhaps our investors would like. And by the way, those are good contracts, and they generate a lot of cash, and they help us build relationships with customers. So we have been moving over time really on both fronts, operating better, being more efficient, using our discretionary funds better. but also, if you will, moving up on the value chain and bidding on more differentiated work and then shying away from things that are LPTA and more commodity.
spk11: Okay. And, Chris, when I mentioned the 11%, I was thinking enterprise-wide.
spk09: Yeah, Rob, well, you're challenging me today then on 11%. percent for the enterprise. Well, that was a great year last year, as we pointed to, you know, 60 basis points came from a couple items that aren't going to repeat. We signaled 10.5 percent as our long-term target at Investor Day. Again, our expectation is to get to that level, and we do believe, as Roger pointed out, depending upon the mix in the portfolio, continuing to pursue areas, contracts, work areas that will give us margin expansion opportunities from there. Got it. Got it.
spk11: Thank you both. Thank you. Thanks, Rob.
spk01: The next question comes from the line of Colin Canfield with Barclays. Please receive your questions.
spk00: Hey, good morning, guys. Thanks for the question. So just to follow up first on Matt and Gavin's question, with respect to the headcount growth and kind of your organic targets that are applying today, FY23, FY24, mid-single digit to high-single digit. Can you just talk to us about the headcount growth assumed in getting into that accelerated organic growth rate?
spk07: Well, yeah, we can. Let's see. We don't really put out numbers, but let's see. We obviously have to add heads. We're at about normally 43,000. The exact number will be in the K, maybe just a little short of 43,000. by like 20 or 30. And we have to add a significant number of people in the thousands, again, without putting out a specific number. And I think your question is really more the risk around being able to continue to attract people to the company. And there's something, actually, as a leadership team, we look at literally every week. And we look at the number of people that we've hired and the people who have left either the great resignation have left the industry or retired or the people that have gone to competitors. And we are still comfortable with our ability to attract and retain the workforce that we need. The other question we usually get is about wage inflation. And I'll just hit that one is that we have seen a little bit of uptick in what we're paying people. It's all based in our numbers and our guidance. But we're also seeing the opportunity to hire some college grads at a lower wage rate. And frankly, some of the skills we need are coming right out of college, like Python programming language. And so that allows us to bring in some earlier career people into our cost structure, which has a beneficial effect. So we always say that the workforce is a risk item for us. But we've been fortunate to create a company and a culture where people want to come to work. And we, frankly, our first six weeks of the year have been pretty impressive on the hiring that we've already done in 2022.
spk09: Carl, the only thing I would add to Roger's comment, and he's right, it is thousands of employees, but it doesn't have to grow at the same rate as revenue because some of the things we pointed to for the 23 and 24 catalysts are going to come more on the manufacturing product side those production programs and Dynetics and the return of the SD&A business market that we expect, those don't require the same level of headcount growth contributions to drive that revenue uplift. So it's a big challenge. We're focused on it, but it's not a one-for-one relationship to get to the outcome.
spk00: Got it. Thanks. And then with respect to the margin question, kind of following up to Rob's vein of thinking, Both you and CACI are assuming that you can make shifts kind of in a better work. Can you just talk to us about, you know, what sort of competitive win rate you're assuming on hardware type contracts and kind of where Leidos competes on price versus capability?
spk07: Let's see. I'm not sure I even know the number on hardware versus digital transformation. I'll describe just a little bit. The acquisition process for us on hardware is very, very different than, say, some of our large digital transformation opportunities. The large digital transformations are a lot of bidders, RFP process, draft RFP, competitive bid, maybe down selected to then a competitive bid. On the hardware side, it starts with spending our own R&D to create a concept and investing in a prototype or a demo or a simulation and then maybe getting like a cooperative research program where we take it out in the field and we shoot a prototype and we get a customer interested in it and eventually that leads to a limited production order which can actually lead to a large production order. So for us, and I can't speak to the other people in our industry, In the areas where we compete, we're really competing off of differentiated technology that we've developed. Very rarely are we taking our widget against somebody else's widget and a third party's widget, and we're fighting it out in the proposal process, which again is typically in our large digital transformation jobs how we win there. And it's why we like some of this in our mix. If you followed our story over the long term, you know we've said we would like a little bit more product, a little bit more hardware, where we can invest in a differentiation, and then we can reap the benefits of that over the long term.
spk09: The only other thing I'd add there, Colin, is on the differentiation front, the other attribute that allows us to be successful is speed. And we've talked about that, but we're more nimble, we're more agile, and so sometimes as we're looking at positioning for emerging capabilities, our ability to get that delivered and fielded more quickly, because we can respond more quickly, is a characteristic that allows us to be successful.
spk07: Yeah, just an example there, because you can tell that we're really excited about this part of our business. We had a customer who needed an airborne asset, and we went from concept to delivery within 12 months. So, You know, we bought the airplane, we modded the airplane, we put equipment in it, the customer gave us some GFE, we went through a test program, we got it fielded within 12 months. And that, you know, speed, security, and scale we think is one of our differentiators.
spk01: Thank you. The next question comes from the line of Mariana Perez-Mora with Bank of America. Please proceed with your questions.
spk02: Good morning, everyone.
spk09: Morning.
spk02: So 1% to 4% organic growth. What makes you confident that this is just a slow start and you could get to the mid-single-digit growth in the next three years, and this is not a new normal from a macro environment? So in other words, given this uncertain environment, why not under-promise and over-deliver?
spk09: Well, we're only giving 22 guidance today, right? And so we're trying to make sure that based on the factors we've seen, Mariana, over the last four months, it reflects those challenges that we see. But at the same time, we also see these needs and these opportunities in the pipeline. And so as we sit here today, we look at where our customer's going and the things that we think ultimately they will be buying and the demands that they have and the funding levels that we believe will be there, still give us, you know, the ability to achieve that longer-term aspiration that we have for growth. But for right now, 22, you're right, it is a little bit more of a cautious start given the uncertainty in the environment today. But we try to paint a picture of how that could increase our growth rate over time depending upon how some of these uncertainties resolve themselves.
spk07: Yeah, and Mariana, we've talked about this in the past, is we have been trying to position the company to where we think the puck will be in the future. And as we look at the omnibus, we think there's going to be an even greater growth in non-defense, so that will benefit us in our health and civil business, which we have bolstered over the past several years. And then within defense, the shift to great power competition will which we think benefits things like space and hypersonics and electronic warfare, again, areas that we have been positioning now for years. And so we're enthusiastic about the long term. In first quarter of 2022, there's just a lot of risk that needs to be retired, which is why we are where we are.
spk02: Thank you. And then could you please discuss on competitive dynamics? Are win rates and pricing pressure being affected as more industry players are also doing the scale and scope strategy?
spk09: Competitive dynamics. So I would say that, you know, it's the same competitors that we go up against typically. And, you know, we have a a great team and are leading our business development, great capture managers, a good price-to-win team. We think we have a good pulse on what each procurement competitive set looks like, and so each one's different. To Roger's earlier point, we do try to steer away early in the process in our pipeline of things that we believe are only going to be you know, based upon a price-oriented decision. That's not where we want to compete. But clearly, I mean, the market is always competitive, and we approach it that way. So there's no different, you know, we're not taking our eye off the ball. We always go after everything, anticipating that it's going to be highly competitive. We need to put our best foot forward. And so that's the way we've been prosecuting the bids in our pipeline.
spk02: Thank you very much.
spk06: And, Rob, it looks like we're coming up to the top of the hour. I think we have time for one more question.
spk01: Yes, that question will be coming from the line of Toby Summer with Truist Securities.
spk05: Thank you. I was wondering if you could give us perspective on the proportion of your business up for recompete this year and next and how that may inform the aperture that you have in your business development pipeline to look for new and takeaway work.
spk09: Hey, Toby, this is Chris, and Roger can add some more color. I would say it's actually a lower-than-normal year in 22, and so that kind of informs our internal goal on what we think our book-to-bill needs to be and what our target is. So absolutely, it's an increased percentage of takeaway and new business opportunities that we're going after, and that comes with lower expected win rates. So we have to be very thoughtful about the volume that we're prosecuting through, and certainly we don't take our eye off the ball on any re-competes and put our best foot forward. But it is a lower-than-average year, which is great, so we're definitely more on the attack in 22 than we might ordinarily be. Would that hold true for 23 as well? I would tell you that we haven't probably broken that down with great visibility yet. I mean, there's not one of our top, ten programs that come to mind that are coming up for a re-compete cycle next year. But more color on that as we get our way through the year, Toby. Okay. Thank you. Thank you.
spk01: Thank you. I'll now turn the floor back to management for closing remarks.
spk06: Thank you, Rob, for your assistance on this morning's call, and thank you all for your time this morning and your interest in Leidos. We look forward to updating you again soon. Have a great day.
spk01: This will conclude today's conference. Thank you for your participation. You may disconnect your lines at this time.
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